Four out of five retailers think that the increase will undermine sales with nearly two-thirds convinced that 2011 is going to be a worse year at the tills than 2010, according to a recent poll by the British Retail Consortium, the industry body.

“The combination of the [VAT] rise, coupled with public sector cuts are leaving them gloomier than they were a year ago,” said Richard Dodd of the BRC.

The rise in VAT from 17.5 percent to 20 percent took effect from midnight on Monday and will be a permanent measure, unlike the temporary cut Labour introduced at the end of 2008 to stimulate the economy. It will raise £13 billion in additional revenue for the government over the course of the parliament.

Shoppers are unlikely to feel the effects immediately as retailers absorb the costs as part of the annual January sales and other promotions. But Mr Dodd said that such activity could only be temporary, with the increases feeding through to shelf prices in the coming months.

George Osborne, chancellor of the exchequer, insisted that the VAT rise was a “tough but necessary step’’ towards Britain’s economic recovery.

He confirmed he regarded the increase introduced from midnight as permanent, but said alternatives to tackle the deficit, such as rises in national insurance or income tax, would hit poorer families harder.

He told BBC radio: “I think it is a reasonable rate to set, given the very difficult situation we find ourselves in. The VAT rise is a tough but necessary step towards Britain’s economic recovery."

“If you don’t want to raise VAT, you have got to do something else,’’ he said.

But Alan Johnson, shadow chancellor, accused the government of breaking an election promise and said Labour favored NI rises rather than the VAT increase.

VAT Hike Hits UK

The UK woke up to higher prices on Tuesday when a hike in VAT came into effect. Alan Johnson, UK Shadow Chancellor of the Exchequer criticizes the measure, saying it will curb growth.

Ed Miliband, the Labour leader, on Monday accused the government of implementing the “wrong tax at the wrong time” as he kicked off the party’s Oldham by-election campaign.

He told supporters that the rise would hurt cash-strapped families already struggling to cope with rising fuel prices at the pump and would hamper the fragile economic recovery ahead of next week’s poll.

“The VAT rise is the most visible example of what we mean when we say the government is going too far and too fast because it’s clear that it will slow growth and hit jobs,” he said. “When family budgets are already squeezed now is not the time for a VAT rise to make it even harder to make ends meet.”

The concerns voiced by Mr Miliband and the BRC lend weight to wider concerns that Britain is in for a difficult run in the early months of this year as consumers struggle to cope with slower earnings growth, rising inflation and looming public sector job losses as the government cuts spending by £81 billion over the next four years.

Sir Richard Lambert, outgoing director-general of the CBI, the employers’ group, has warned of a “bumpy” spell in the early months of this year in which economic growth could slow to a standstill.

Mr Miliband, drawing on figures used by the Liberal Democrats in the general election when they campaigned against VAT rises, said the increase would cost the average family £7.50 a week – nearly £400 a year – at a time when people could least afford it.

George Osborne, the chancellor, responding to Mr Miliband’s claims, said: “Labour left Britain with record debts that people know we have to deal with to avoid an economic crisis.

“VAT is a powerful weapon to tackle debt and if we don’t use it then the spending cuts would be over £13 billion bigger," he said.

“The question Ed Miliband faces is this: if you’re not raising VAT, where are the extra £13 billion of spending cuts coming from? The NHS? Schools?," he added.